How Digital Tokens Work

A digital token is similar to issuing a check in a digital form. The holder of the token has the right to claim the underlying asset. Any transferrable asset such as a car, a house, a computer, or also intangible assets such as property rights and licenses, can be represented through digital tokens.

If a company issues digital tokens for its stocks, for example, the receiver of these tokens possesses the right to claim these stocks in exchange for the tokens. Or to go one step further, holding a token equals ownership of the underlying stocks.

Moreover, these tokens can also be passed around between other people. Every transaction of those digital tokens is recorded on a blockchain, providing full transparency about the ownership and security at the same time without needing a central authority or clearing house to regulate anything which in return saves costs and time. The company can even handle its whole dividend payment procedure automatically through these digital tokens because the whole logic behind dividend payouts can be embedded into each token.

Colored Coins

Colored coins as the name indicates, are digital tokens based upon the Bitcoin blockchain. Every bitcoin transaction provides an optional text field which can be used as an identifier to make a normal transaction represent more than just a mere transfer of bitcoin. Simply put, one can use these identifiers to allow bitcoin represent any asset outside the Bitcoin blockchain (e.g., stocks, cars, property rights etc). Such bitcoins which have other assets attached to them are called “Colored Coins”.

Ethereum Tokens

Ethereum tokens are digital tokens based upon the Ethereum blockchain. While the Bitcoin blockchain verifies, records, and replicates transaction data on many computers across the world (therefore the name “distributed ledger”), Ethereum takes a step further, enabling to run small computer programs called smart contracts equivalently on many computers globally. Such functionality allows ethereum tokens to not only represent different assets, but to run complete computer applications through these tokens.